10 Things Debit Card Issuers Won't Tell You

As fees continue to rise and rewards slide, are there incentives left for using debit cards?

By

AnnaMariaAndriotis

1. "Debit-card fees are far from gone."

The past few months have been a big win for consumers in the fight against debit-card fees as Bank of America, Wells Fargo and SunTrust Bank abandoned plans to charge debit-card usage fees. But other debit card fees remain in effect and they're rising. ATM fees are higher than ever, according to Bankrate.com. Each time debit-card holders use an ATM outside of their network, they're charged $2.40 on average (up 3% from a year ago and up 76% from 2001) by the host bank plus an average of $1.41 by their own bank.

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Separately, overdraft fees -- which are charged for nonsufficient funds -- are increasing, too. A Federal Reserve rule that went into effect in August 2010 requires banks to get customer consent before approving debit-card and ATM transactions that are larger than the balance in their checking account. But a 2011 study by the Center for Responsible Lending says many banks conducted aggressive campaigns to get customers to opt in to so-called overdraft protection. Roughly 30% of consumers signed up for this "protection," which approves transactions larger than their checking account balance for a fee. The median overdraft fee is now $29, up 5.4% from last year, according to economic research firm Moebs Services Inc.

The banking industry says consumers can avoid these fees. Customers who signed up for overdraft protection can opt out any time they'd like, says Nessa Feddis, vice president and senior counsel for regulatory compliance at the American Bankers Association. And by sticking to their own bank's ATM network consumers can avoid ATM fees when they take out cash, she says.

2. 'We're to blame for rising checking account fees."

Free checking is becoming a thing of the past and the culprit, in part, is debit cards. To make up for revenues lost from new debit-card regulation, banks are raising checking account fees, says Odysseas Papadimitriou, chief executive at CardHub.com, a credit card comparison web site. "Checking account fees and debit card fees are one in the same," he says.

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Merchants that accept debit card purchases pay banks a fee every time a customer swipes a debit card. This so-called interchange fee used to average about 44 cents per transaction. But new regulations that went into effect in October cut the fee to an average of around 24 cents. That's in part why checking account fees continue to rise. Only 45% of non-interest bearing checking accounts are free, down from 76% in 2009, according to Bankrate.com. On those accounts, monthly account maintenance fees average $4.37, up 85% from a year ago. Banks have also hiked the minimum balance required to avoid checking fees, to an average of $585, up from $249 last year and $185 in 2009.

The ABA's Feddis says that checking account fees have risen because the interchange fee has dropped. That revenue helped subsidize the costs of providing checking account services, she says, which can run $250 to $300 per account per year, she adds.

3. "Debit-card rewards are dwindling."

Debit-card reward programs, such as cash back and airline miles, are becoming less common, decreasing by 30% in 2011, according to Bankrate.com. Many of those programs that signed off this year were at the large banks, including Wells Fargo, Chase and SunTrust. The banks say they're responding to the new swipe fee rule (see previous section). "There is no question that there's a direct link," says Feddis. The ABA says the rule will result in a 45% loss in bank revenue on debit cards.

While debit-card rewards programs still remain, in most cases getting those rewards requires using debit cards for purchases very often, says Richard Barrington, an analyst at MoneyRates.com http://www.money-rates.com/, which tracks banking products. Or they require a significant dollar amount of purchases. At TD Bank, for example, debit-card holders have to swipe at least $2,000 worth of purchases before they can start redeeming points. TD Bank says it has no plans to change this rewards program. Some debit cards offer rewards on a rotating group of retailers that experts say may not add up to much. In July, Ally Bank rolled out a new debit-rewards program that automatically gives money back on purchases made at participating merchants that have included iTunes, 1-800-FLOWERS and Barnes & Noble Online. Ally Bank says the amount of cash back varies by merchant and ranges from 10% to 50% back.

4. "Credit cards can be a better deal than debit cards."

For years, consumers have been told that debit cards have more benefits than credit cards. Debit card users don't run the risk of going into debt and damaging their credit score like they do with credit cards. But some experts are questioning that logic. For consumers who diligently pay off their credit-card balance each month there's little reason to use debit cards, says John Ulzheimer, president of consumer education at SmartCredit.com, a credit-monitoring site. They won't incur interest rate charges, or late fees, and they can avoid annual fees by using credit cards that don't charge them.

The reason boils down to rewards. During the recession, credit-card rewards programs were cut back significantly but they started to make a comeback about a year and a half ago. This year, competition has intensified, and credit-card rewards are becoming more generous while debit-card rewards are fading. Credit-card rewards have become attractive in part because they're not subject to the new lower interchange fee that debit cards have, says Feddis. Chase, for instance, offers 1% cash back on all purchases made with its credit cards -- twice what its now-defunct debit rewards program paid. (Two Chase cards offer up to 5% cash back on certain purchases.)

Meanwhile, Capital One's Venture credit card lets users rack up airline miles quickly. A cardholder who charges $20 will get 40 airline mile points. Compare that to the Capital One Rewards debit card that awards between 5 and 20 airline mile points for a $20 purchase. A Capital One spokeswoman says changes in the debit landscape have had no effect on its credit-card marketing activities and that both cards launched prior to regulatory changes that impacted debit cards. She adds that debit-card rewards also accumulate when consumers arrange for direct deposits to their checking account and use the account to pay bills online.

5. "Still want to hold onto debit? Prepare to be pushed out."

At least one bank seems to be encouraging its customers to make the switch from debit to credit. In September, Bank of America announced that it was discontinuing the rewards program on its Merrill Lynch debit card, which is used by its brokerage clients. Those cardholders have until May to redeem their rewards -- or they can transfer their rewards to the Merrill Visa Signature credit card.

It's part of an overall push by banks to get more consumers to sign up for credit cards in lieu of debit cards, says Bill Hardekopf, chief executive at LowCards.com, which tracks credit-card offers. A Bank of America spokeswoman says the bank isn't steering clients to credit cards but only offering them the alternative.

That may be, but plenty of banks are hoping the current massive marketing push for credit cards will help consumers forget about using debit. During the third quarter of 2011, credit-card mail solicitations reached an all-time peak: 80% of credit-card mail featured 0% introductory rate offers on purchases -- the highest ever, according to Synovate Mail Monitor, which tracks credit-card mail. This year, around 78% of credit-card mail featured this offer, up from 70% during all of 2010 and 53% in 2009. The ABA's Feddis says banks are rolling out more credit-card offers because they're not losing money to lower interchange fees like debit cards are. What's more, fewer people are missing payments on credit cards these days, making credit cards a less risky business compared to a few years ago, she says.

6. "Retailers aren't passing savings onto debit-card holders."

The retail industry fought hard for lower debit-card swipe fees. Part of the pitch? The money they saved in fees would be passed onto shoppers by way of lower prices. But it's been more than two months since the fee change went into effect and discounts for paying with a debit card at a major retailer have yet to be announced.

It's far too soon to see lower prices or discounts, says Mallory Duncan, senior vice president and general counsel at the National Retail Federation. He says that some retailers will offer discounts as a result of the lower debit-card swipe fees in the future. In other cases, rather than lower prices across the board, a bulk of retailers will offer special services, he says, such as free delivery (like at electronics and appliance stores ) or free gift wrapping while high-end retailers might use the savings to improve service by adding additional salespeople.

At some merchants though, particularly where items cost $10 or less, prices could actually increase as a result of these new debit-card swipe fees, he says. Small-ticket retailers like fast food restaurants and coffee shops that used to get charged 10 cents or less to process a transaction are now being hit with the full swipe fee of around 21 to 24 cents, says Duncan. (That's a discounted fee for many retailers who paid around 44 cents on average each time consumers swiped their debit cards prior to the new rule but it's a higher fee for small-ticket stores.) Consumers shopping at those stores might want to consider paying with cash.

7. "Your bank account is vulnerable to thieves."

Debit card thefts -- be it the actual card itself or the account number -- can destroy consumers' finances. In the worst-case scenario, a debit-card theft could wipe out a cardholder's bank account, and if a checking account is linked to a savings account, victims could lose that money, too, says Jay Foley, identity theft expert and founder of the ID Theft Info Source, a consulting firm.

Consumers are advised to move quickly in reporting the theft to the card issuer. When a physical card goes missing or is stolen, consumers have just two business days after learning about the loss to notify the card issuer in order to limit their losses to just $50. But wait longer than that and the chances of recovering whatever money was fraudulently taken decline. Consumers who wait more than 60 days after receiving their checking account statement that shows fraudulent withdrawals could be at risk of losing hundreds of dollars and possibly all the money in their account. The same 60-day period rule holds true for consumers whose actual card wasn't stolen but whose debit-card number was and was fraudulently used. Consumers should consider checking their account activity every couple of days, to review their checking account statements when they arrive, and to notify their bank of suspicious activity immediately.

8. "We mean nothing to credit scores."

Here's another reason credit trumps debit: Using debit will do nothing to help a consumer establish a credit history or to boost or rebuild their credit score, says Ulzheimer. That's because debit cards are essentially plastic versions of traditional paper checks. Banks don't report activity on checking accounts or debit cards to the national credit reporting agencies, he says.

For consumers who don't plan on applying for financing in the future, missing out on this benefit might not be a big deal. But those thinking of purchasing a home in the next few years would benefit by a higher credit score, since that will ultimately help them qualify for a lower mortgage rate.

Consumers who swipe their credit cards -- and pay off those debts promptly -- can boost their FICO score. That score also increases as more time passes since the consumer has opened a credit account. In addition it rises when consumers pay down their debts on time, don't owe money on their credit cards or loans and sign up for a variety of credit, including credit cards, a car loan and a mortgage.

9. "We charge college students outrageous fees."

Debit cards seem perfect for college students. Convenient, but unlike credit cards, they can't spend what they don't have. What's more, some cards are set up so that students who receive tuition refunds during the school year -- due to dropping a course, say, or a meal plan -- get that money credited to their debit card. Connecticut-based Higher One, for example, partners with about 770 college campuses to provide debit cards to two million college students, up from 1.5 million a year ago.

But convenience comes with a price. Higher One charges high fees, including 50 cents for each debit card purchase made using a PIN number. There's also a $2.50 charge to get cash each time students use a non-Higher One ATM. Students may also be charged up to $19 a month if they don't use the card for nine months. For its part a Higher One spokeswoman say the company's goal is to provide convenience to college students. If students don't want to receive their tuition refund via the debit card, Higher One can issue them a check or it can deposit the money directly to the bank the student chooses. For students, this could be a way to avoid the company's debit-card fees, which could otherwise eat into their tuition refunds.

Students can find better debit-card deals, experts say. Student loan lender Sallie Mae began rolling out its own ATMs on college campuses this month. The company is offering student checking accounts and MasterCard debit cards. Students can avoid the $2 non-network ATM fee if they use one of the 35,000 network ATMs throughout the country. Sallie Mae also charges a $19 bounced check fee. Students can also receive tuition refunds through Sallie Mae accounts. Sallie Mae says it's offering one of the lowest-cost checking accounts for college students and easy access to tuition refunds.

10. "Watch out for our cousins: prepaid cards."

Similar to debit cards, prepaid cards allow cardholders to deposit money into an account and to draw on those funds for purchases or cash withdrawals. But the lower swipe fees that are making debit cards less appealing to banks don't apply to prepaid cards. That means more revenues for banks when consumers shop with prepaid cards. It's likely that banks will start pushing prepaid cards as a debit alternative in 2012, says CardHub.com's Papadimitriou. The ABA's Feddis says more banks are likely to start offering prepaid cards to consumers.

But here's the problem for consumers, say experts: Most of these cards have high fees. The average monthly fee on prepaid cards is $4.56, according to CardHub.com. In some cases it can be up to $10. Some cards also charge fees when they're loaded from a credit or debit card and to speak with a live customer service agent. And, like regular debit cards, prepaids don't help consumers build a credit history. Prepaid issuers say their cards are largely intended to help teens and young adults to learn how to manage money before moving on to a credit card while protecting them from falling into debt.

Of course some prepaid cards are more affordable than others. For someone who receives a monthly paycheck of at least $2,000 and uses the ATM at least once a week, the Green Dot Gold Prepaid Visa card comes out to $0 a month, according to a CardHub.com study. American Express' card doesn't charge monthly fees but does charge $2 for each ATM withdrawal after the first one each month; the company says it doesn't charge most of the fees that accompany most prepaid cards and that it's card is easy to use and transparent.

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